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Bulletin #0678-C

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Brett Konyu
Director, Member Education and Membership Services
Marc Guerin
Director, Member Education
Compliance
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Report on 2015 Review of Specific Policies and Procedures: Pre-Trade Disclosure, KYC Updates, Concentration Criteria, and Titles Targeting Seniors

As part of the MFDA 2015 Compliance initiatives, MFDA staff conducted a review of Members’ policies and procedures in the following areas of focus: pre-trade disclosure, updating Know-Your-Client (“KYC”) information, concentration criteria, and titles targeting seniors. The results of this review including our key observations and recommendations are contained in the attached report.

We encourage Members to review and consider the recommendations provided. We will continue to assess Members’ policies and procedures in these areas in future compliance examinations.

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2015 Review of Specific Policies and Procedures:
Pre-Trade Disclosure, KYC Updates, Concentration Criteria and Titles Targeting Seniors

February 04, 2016

DM #440275

Introduction

As part of the MFDA 2015 Compliance initiatives, MFDA staff conducted a review of Members’ policies and procedures in the following areas of focus: pre-trade disclosure, updating Know-Your-Client (“KYC”) information, concentration criteria, and titles targeting seniors.

In each area of focus, this report outlines key observations, highlights policies and procedures that Members have implemented, and provides MFDA staff recommendations and guidance to Members.

Pre-Trade Disclosure of Fees and Charges

Disclosure of transaction fees and charges prior to the Member’s acceptance of an order assists clients in making informed decisions with respect to transactions in their account. Members should have detailed policies and procedures outlining the types of fees and charges that should be disclosed, how the information should be communicated to clients and how evidence of disclosure should be documented and maintained.

Relevant Rules and Guidance

MFDA Rule 2.4.4  (Transaction Fees or Charges) requires that, prior to the acceptance of any order in respect of a transaction in a client account, the Member shall disclose to the client any transaction charges and:

  1. charges in respect of the purchase or sale of a security or a reasonable estimate if the actual amount of the charges is not known to the Member at the time of disclosure;
  2. in the case of a purchase of a security to which deferred charges apply, that the client might be required to pay a deferred sales charge on the subsequent sale of the security and the fee schedule that will apply; and
  3. whether the Member will receive trailing commissions in respect of the security.

MFDA Rule 5.1(b)(iv) (Requirement for Records) requires the Member to maintain evidence that the client was informed of all fees and charges in accordance with Rule 2.4.4.

MFDA Staff Notice MSN-0078  provides additional guidance regarding the types of fees and charges to be disclosed, the level of detail required in the disclosure, the method of disclosure and application in specific situations.

As of May 30, 2016, National Instrument 81-101 Mutual Fund Prospectus Disclosure will require Members to deliver a Fund Facts document to a client before accepting an instruction to purchase a mutual fund.

General Observations

All Members have policies and procedures to comply with MFDA Rule 2.4.4 but the level of detail varies between Members.  Those Members with effective practices provide detailed guidance to their Approved Persons (“AP”s) to promote compliance with Rule 2.4.4.  These practices include:

  • Requiring APs to provide dollar estimates of the transaction fees and charges to the extent possible;
  • Incorporating disclosure on standard forms (e.g. trade order forms or fees and charges templates) and listing out in detail the types of fees and charges to be disclosed;
  • Standard templates to record detailed notes of discussions with clients where disclosure was provided verbally; and
  • Requiring the Fund Facts document to be delivered and discussed with the client for purchase transactions.

While the requirement to provide pre-trade disclosure of fees and charges applies to transactions for securities, we noted some Members provide the same level of disclosure for transactions in all investment products (e.g. segregated funds and GICs). Many Members’ policies go beyond the requirements of Rule 2.4.4 and also require APs to provide other useful information, such as disclosing withholding taxes or discussing any tax implications to the client.

Where Members use a standard form or template, these forms list the various types of transactions, fees and charges and provide instructions on how to complete the form.  For example, for deferred sales charge (DSC) purchases, the forms contain fields to record the full DSC schedule by year as well as the trailing commission percentage.  For redemptions, the forms contain fields to record the amount of the redemption charge in percentage and dollar terms.

Some Members also provide guidance on the specific situations outlined in MSN-0078, including where the client has placed an unsolicited trade but is unavailable or unreachable.

Member policies and procedures also contain guidance for supervisory staff to review for adequate evidence of disclosure of fees and charges when performing daily trade reviews, including selecting a sample of purchases and all redemptions where the client incurred significant redemption charges. Members also have procedures in their Policy No. 5 Branch Review Programs to test compliance with Rule 2.4.4., including interviewing APs on pre-trade disclosure practices and testing transactions for evidence of disclosure.

However, we noted that not all Members have comprehensive policies and procedures regarding pre-trade disclosure.  For example, we observed instances where the Member’s policies and procedures are an exact copy of MFDA Rule 2.4.4 with no additional guidance provided to APs on how to comply with the requirements.  We found policies and procedures that have not been updated to reflect the current requirements of MFDA Rule 2.4.4 (effective July 15, 2014) or to reflect the requirement to deliver a Fund Facts document instead of a prospectus.  We also noted instances where there is minimal guidance for APs on what types of fees and charges to disclose, how fees and charges should be disclosed or how evidence of disclosure is to be maintained.

Good Practices and Recommendations

  • Policies and procedures outlining:
    • fees and charges that should be disclosed and examples of different situations where fees and charges are incurred and what needs to be disclosed in these situations;
    • the level of detail required to satisfy disclosure requirements;
    • the methods of disclosure that are acceptable;
    • the use of standard templates to record evidence of disclosure;
    • the disclosure of fees and charges in respect of products that are not securities;
    • the disclosure of any impact of the transaction that does not meet the definition of a fee or charge (e.g. withholding taxes or other tax implications);
    • pre-sale delivery of the Fund Facts document to comply with Rule 2.4.4 and 81-406;
    • the specific circumstances in MSN-0078; and
    • supervisory requirements to test for evidence of compliance with Rule 2.4.4.
  • Training of APs and supervisory staff on pre-trade disclosure requirements and Member policies and procedures.

Updating Know-Your-Client (KYC) Information

Members and APs are required to learn essential facts relevant to each client to ensure recommendations made are suitable based on the client’s specific circumstances.  Client circumstances can change over time.  A change in circumstance may be planned (e.g. retirement or the purchase of a house) or unexpected (e.g. job loss or illness). Accordingly, regular contact with clients to inquire about their circumstances is necessary to maintain complete, timely and accurate KYC information.

Relevant Rules and Guidance

MFDA Rule 2.2.1 (Know-Your-Client) states that each Member and Approved Person shall use due diligence to learn the essential facts relative to each client and to each order or account accepted.  It further states that each Member and Approved Person shall use due diligence to ensure that each order accepted or recommendation made, including recommendations to borrow to invest, for any account of a client is suitable for the client based on the essential facts relative to the client and any investments within the account.

MFDA Staff Notice MSN-0069 (Suitability) advises that Member policies and procedures should include recommended timeframes to update KYC information and describe the approval process for KYC updates.

General Observations

Members generally have policies and procedures to update KYC information on a regular basis (e.g. at each client meeting or at least annually), to obtain client authorization for KYC updates and to complete all KYC information on a new KYC form for each KYC update.  Several Members have specified timeframes (ranging from 1 to 3 years) for APs to update the KYC form on file, even when there is no material change in the client circumstances, and have procedures to identify client accounts with stale-dated KYC information.

Some Members have back office systems that are capable of providing supervisory staff with reporting on stale-dated KYC information and have the capability to notify the AP and restrict accounts with stale-dated KYC information from additional purchases.

We noted some Members’ policies and procedures did not provide sufficient guidance to APs on when KYC information should be updated. 

Good Practices and Recommendations

  • Policies and procedures outlining:
    • when a documented KYC update would be required;
    • the full documentation of all KYC information on a new form where only some of the criteria has changed;
    • requirements to identify stale-dated KYC information and require updates;
    • requirements for APs to regularly review the currency of KYC information; and
    • requirements for supervisors to assess the reasonableness of KYC;
    • requirements to restrict accounts with stale-dated KYC information from further purchases.
  • Training of APs and supervisory staff on Member policies and procedures regarding updating KYC information.

Concentration Criteria

Accounts that are concentrated in a single investment or sector can be subject to greater volatility and pose greater risk than those that are well diversified.

As part of the supervisory process, Members should assess concentration risk in exempt securities and in certain higher risk sector mutual funds, such as precious metals and resource funds.

Relevant Rules and Guidance

MFDA Rule 2.2.1 (Know-Your-Client) states that each Member and Approved Person shall use due diligence to ensure that each order accepted or recommendation made, including recommendations to borrow to invest, for any account of a client is suitable for the client based on the essential facts relative to the client and any investments within the account.  It further states that each Member and Approved Person shall use due diligence to ensure that the suitability of the investments within each client’s account is assessed:

  • whenever the client transfers assets into an account at the Member;
  • whenever the Member or Approved Person becomes aware of a material change in client information, as defined in Rule 2.2.4; or
  • by the Approved Person where there has been a change in the Approved Person responsible for the client’s account at the Member;

and, where investments in a client’s account are determined to be unsuitable, the Member or Approved Person so advises the client and makes recommendations to address any inconsistencies between investments in the account and the essential facts relative to the client and the Member or Approved Person maintains evidence of such advice and recommendations.

MFDA Staff Notice MSN-0069 (Suitability) advises that Members should consider the concentration of investments in exempt securities when performing a suitability assessment. An appropriate concentration limit would depend on the exempt security being distributed.   MFDA Staff Notice MSN-0048 (Know-Your Product) further advises that as part of the KYP due diligence process, concentration limits should be assigned to products and/or general classes of products where appropriate.

General Observations

Most Members that sell higher risk exempt securities have established concentration criteria in their policies and procedures.  Some Members also have policies and procedures to identify concentration issues in sector specific higher risk mutual funds.   Generally, the concentration criteria are set at 25% of the assets in the client’s account (or accounts) at the Member or 10% of the client’s net investible assets. When assessing concentration on the client’s net investible assets, some Member’s policies and procedures require APs to obtain proof of client investible assets that are held outside the Member.

While Members generally have concentration policies for higher risk exempt securities, some Members’ concentration policies do not also consider sector specific higher risk mutual funds.  Further, we noted some instances where Member policies and procedures do not include explanations of how to calculate the limits or were unclear as to whether the limits were based on the assets in the client’s account or the client’s net investible assets.

Good Practices and Recommendations

  • Maintain a list of positions that should be subject to a concentration limit (e.g. higher risk exempt securities and sector specific funds).
  • Policies and procedures outlining:
    • specifically how to calculate the concentration limit.  Members may want to adopt concentration limits which consider client assets in the account, client assets at the Member or all investible assets of the client (which may be held outside the Member).
    • the preapproval of purchases in higher risk exempt securities.
    • how to assess reasonability and reliability of the value of the outside financial assets, where such assets are used to determine concentration.
    • the use of KYC forms that collect sufficient details of the client’s net investible assets.
    • supervisory requirements to review for concentration concerns as part of the daily trade supervision process. 
  • Training of APs and supervisory staff on Member policies and procedures regarding concentration.

Titles Targeting Seniors

There is an increasing awareness of issues regarding seniors and the MFDA continues to be focused on protecting seniors in its compliance and enforcement activities. Members’ must approve the use of all business titles and designations but should be particularly focused on those that target senior investors. 

Relevant Rules and Guidance

MFDA Rule 1.2.1 (d) (Business Titles) states that no Approved Person shall hold him or herself out to the public in any manner including, without limitation, by the use of any business name or designation of qualifications or professional experience that deceives or misleads, or could reasonably be expected to deceive or mislead, a client or any other person as to the proficiency or qualifications of the Approved Person under the Rules or any applicable legislation.

General Observations

Only a limited number of Members reported that their APs use titles targeting seniors.  Members have policies and procedures that require APs to inform the Member and obtain approval for any business title or designation prior to its use. Some Members use procedures to identify and review undisclosed business titles and designations including during the review of annual attestations, the review of advertising and marketing materials, and the Member’s Policy No. 5 Branch Reviews.

The following are examples of the business titles and designations in use by APs:

  • CEA – Certified Executor Advisor, Certificate in Retirement Strategy
  • RFRA – Registered Financial and Retirement Advisor
  • CPCA – Certified Professional Consultant on Aging
  • CRC – Certified Retirement Counselor
  • CSA – Certified Senior Advisor
  • EPC – Elder Planning Counselor
  • RRC – Registered Retirement Consultant

Please see Appendix I for more information on the above business titles/designations.

Good Practices and Recommendations

  • Policies and procedures outlining:
    • APs to advise the Member of any business titles and designations;
    • the review and approval of business titles and designations prior to use;
    • APs to complete an annual questionnaire disclosing the titles and designations in use and Member supervisory staff review;
    • Policy No. 5 Branch Reviews to request and review business cards and marketing and sales material;
    • the Member to maintain a list of all titles and designations in use by each AP; and
    • the use of only a limited number of preapproved titles and designations.
  • Policies and procedures setting out the criteria to use when assessing the acceptability of a new business title or designation.
  • Training of APs and supervisory staff on Member policies and procedures regarding business titles and designations.

Conclusion

We encourage Members to review the good practices and recommendations contained in this report, update their policies and procedures and provide staff training in these areas.  We will continue to assess Members’ policies and procedures in these areas in future compliance examinations.

MFDA is also considering developing additional tools and guidance on some of these topics in the future.   However, Members with additional questions or those seeking guidance in enhancing their policies and procedures should contact their assigned MFDA Compliance Manager for further assistance. 

Appendix I

Titles Targeting Seniors

CEA – Certified Executor Advisor

Issuing Organization

Canadian Institute of Certified Executor Advisors

Prerequisites/ Experience Required

No. Candidates currently work in one of the 17 professions executors may turn to in the course of their duties.

Educational Requirements

70% passing grade

Exam Type

Multiple choice

Continuing Education

15 hours each year starting in the second year of membership, in the areas of executor issues, estate planning and federal and provincial legislative changes

Investor Complaint Process

Yes at Contact Us

Public Disciplinary Process

Yes

Check Professional’s Status Online

Online at Find a CEA

RFRA – CIFP Registered Financial and Retirement Advisor

Issuing Organization

Canadian Institute of Financial Planning (CIFP)

Prerequisites/ Experience Required

Education prerequisites to enroll in Registered Financial and Retirement Advisor Program: none

Prerequisites for RFRA certification: one-year qualifying work experience

Educational Requirements

To successfully complete the educational requirements of the Registered Financial and Retirement Advisor Program, candidates must:

  • review Part I and Part II of the RFRA Program online course content
  • complete all end-of-unit formal assessments
  • successfully complete the final course examinations for Part I and Part II

To pass the Registered Financial and Retirement Advisor Program, candidates require a minimum cumulative grade of 60% weighted as follows:

  • 30% of the Program final grade is based on the cumulative grade attained on the end-of-unit formal assessments in Part I and Part II
  • 70% of the final grade is based on the grade achieved on the final Program examinations for Part I and Part II (NOTE: the candidate must achieve a minimum grade of 60% on each final examination to pass the Program).

To attain RFRA certification, in addition to the educational requirements listed above, candidates must also successfully complete the CIFP Retirement Plan which involves the creation of a retirement plan based on the candidates’ analysis of a detailed case study provided by the CIFP Retirement Institute.

The CIFP Retirement Plan is graded as “pass” or “fail”.

Exam Type

The final examinations for the Registered Financial and Retirement Advisor Program are structured as follows:

  • Part I: an online, three-hour multiple-choice examination
  • Part II: a proctored, paper-based, three-hour multiple-choice examination

Continuing Education

To remain a Registered Financial and Retirement Advisor in good standing, an individual holding the RFRA designation must complete a minimum of 10 continuing education activities approved by the CIFP Retirement Institute on an annual basis

Investor Complaint Process

Yes (through the CIFP Retirement Institute)

Public Disciplinary Process

Individuals holding out as a Registered Financial and Retirement Advisor must agree to abide by:

  • a Code of Conduct
  • Practice Standards

Check Professional’s Status Online

Yes

CPCA – Certified Professional Consultant on Aging (previously Certified Senior Advisor)

Issuing Organization

Age-Friendly Business

Prerequisites/Experience Required

No

Educational Requirements

CPCAs must complete successfully 24 tested modules addressing the financial, health, and social aspects of aging, as well as the legal considerations involved in serving an aging client base.

See How to Earn the CPCA® Designation for further information

Exam Type

Multiple Choice

Continuing Education

15 hrs every two years

Investor Complaint Process

Online at Filing a Complaint

Public Disciplinary Process

Yes through a Board of Standards

Check Professional’s Status Online

Online at Find a CPCA Near You

CRC – Certified Retirement Counselor

Issuing Organization

International Foundation for Retirement Education (InFRE). Accredited by the National Commission for Certifying Agencies (NCCA)

Prerequisites/ Experience Required

Candidates must:

  • Verification that the Candidate meets the education and experience requirements of completion of a bachelor’s degree (or higher), or its equivalent, in any discipline, from an accredited college or university and a minimum of two (2) years relevant retirement related professional experience (within the last five years) -or- completing a high school diploma or its equivalent and five (5) years relevant retirement related professional experience (within the past seven years)
  • Passing a complete background check upon meeting education and experience requirements.
  • Completing an initial Certificate Holder’s Statement indicating adherence to the CRC Code of Ethics and annual continuing education requirements. InFRE must receive this document within three months of notification of passing the exam or the Candidate must retest.

Educational Requirements

No, but Candidates must pass a Certification exam

Exam Type

Proctored 200 multiple choice questions

Continuing Education

15 hours every year

Investor Complaint Process

Online at CRC Complaint Form

Public Disciplinary Process

Yes at Certificant Complaints and Discipline

Check Professional’s Status Online

Online at Search for Certified Retirement Counselor

CSA – Certified Senior Advisor

Issuing Organization

Society of Certified Senior Advisors

Prerequisites/Experience Required

None

Educational Requirements

Knowledge to pass the exam

  1. Certification Requirements:
    1. Pass the CSA Exam
    2. Pass a background check
    3. Sign and adhere to the CSA Code of Professional Responsibilities

Exam Type

Online exams and final proctored certification exam (closed book)

Continuing Education

30 SCSA credits every three years

Investor Complaint Process

Email complaint to society@csa.us or call 1-800-653-1785

Public Disciplinary Process

Online at Disciplinary Actions

Check Professional’s Status Online

Online at www.csa.us Click on Find a CSA or call 1-800-653-1785.

EPC – Elder Planning Counselor

Issuing Organization

Canadian Initiative for Elder Planning Studies Inc.

Prerequisites/ Experience Required

No

Educational Requirements

Candidates must complete a four module program and pass the EPC Qualification Examination.

Program is delivered via “Live” Exam Preparation Classes or Distance Learning on your own

See EPC Curriculum for course descriptions

Exam Type

125 Multiple Choice Proctored Examination

Continuing Education

30 credits every year

Investor Complaint Process

Online at Complaints

Public Disciplinary Process

No

Check Professional’s Status Online

Online at Members

RRC – Registered Retirement Consultant®

Issuing Organization

Canadian Institute of Financial Planning (CIPF)

Prerequisites/ Experience Required

Education prerequisites to enroll in Registered Retirement Consultant Course: none

Prerequisites for RRC certification: one-year qualifying work experience

Educational Requirements

To successfully complete the educational requirements of the Registered Retirement Consultant Course candidates must:

  • review the online course content
  • complete all end-of-unit formal assessments
  • successfully complete a final course examination

To pass the Registered Retirement Consultant Course, candidates require a minimum cumulative grade of 60% weighted as follows:

  • 30% of final grade is based on the cumulative grade on the end-of-unit formal assessments
  • 70% of final grade is based on the grade achieved on the final course examination (NOTE: the candidate must achieve a minimum grade of 60% on the final course examination to pass the Course).

To attain RRC certification, in addition to the Course requirements listed above, candidates must also successfully complete the CIFP Retirement Plan which involves the creation of a retirement plan based on their analysis of a detailed case study provided by CIFP Retirement Institute. The CIFP Retirement Plan is graded as “pass” or “fail”.

Exam Type

The final examination for the Registered Retirement Consultant Course is a proctored, three-hour multiple-choice examination.

Continuing Education

To remain a Registered Retirement Consultant in good standing, an individual holding the RRC designation must complete a minimum of 10 continuing education activities approved by the CIFP Retirement Institute on an annual basis

The CIFP Registered Retirement Consultant Course has been pre-approved by CECAP for 30 Professional Development IIROC continuing education credits for Cycle 5

Investor Complaint Process

Yes (through the CIFP Retirement Institute)

Public Disciplinary Process

Yes (through the CIFP Retirement Institute)
Individuals holding out as a Registered Retirement Consultant must agree to abide by:

  • a Code of Conduct
  • Practice Standards

Check Professional’s Status Online

Yes